Fundmastery Blog

Kurt Brouwer October 19th, 2009

In a post on the Cash for Clunkers program, I joked about a similar program for appliances.  But, I should not have joked because such a program was included in the economic stimulus program passed earlier this year.  CNBC reports [emphasis added]:

Dollars for Dishwashers? Appliance Rebates on the Way (CNBC, August 20, 2009, Christina Cheddar Berk)

…The government’s so-called “Cash for Clunkers” program has been grabbing headlines, but it’s not the only federal program putting money back into consumers’ pockets. A new government program is poised to help appliance manufacturers the same way “Clunkers” gave a jump start to auto manufacturers.

As part of the Obama Administration’s economic stimulus bill, nearly $300 million was set aside to fund a state-run rebate program for consumers purchases of Energy Star-qualified home appliances.

Like the “Clunkers” program, the plan takes aim at energy guzzlers. However, unlike in the popular auto program, consumers will not have to turn in their old appliances in order to buy a more efficient one and qualify for the rebate. However, the exact criteria remain unclear because states are still drafting their individual plans, with the hope of having the programs up and running by the end of this year…

Great line that says so much, ‘…the exact criteria remain unclear…’  It really is impossible to parody Congress anymore.  And, of course, the fact that Cash for Clunkers has been a fiasco will not stop implementation of Dollars for Dishwashers.

Now, we find that even Dollars for Dishwashers was not the end of the government’s effort to subsidize our purchases.  We also have Cash for Golf Carts.

Cash for Golf Carts 

As part of the American Recovery & Reinvestment Act of 2009 (ARRA), there is a stimulating program that is helping golfers buy electric golf carts.  I am not knocking golfers with this post, in fact, I play golf from time to time.  I even spent several years of my wayward youth caddying at a tony country club.

However, I really don’t see why we need to borrow money — that’s what economic stimulus really means at this point — to subsidize golfers who want to buy a cart, do you?

One problem with very large government programs is that there are always unintended consequences.  I suspect the legislators who worked on this program did not really intend to give electric golf cart sales a boost, but who knows what evil lurks in the heart of the vast golf cart lobby? This editorial from the Wall Street Journal describes  program [emphasis added]:

Cash for Clubbers (Wall Street Journal, October 17, 2009)

…Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart...which is typically in the range of $8,000 to $10,000. “The purchase of some models could be absolutely free,” Roger Gaddis of Ada Electric Cars in Oklahoma said…

Free.  When it comes to almost any consumer product, if you make it free, you can in fact stimulate demand. That’s not exactly news though.

The golf-cart boom has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

…The IRS has also ruled that there’s no limit to how many electric cars an individual can buy, so some enterprising profiteers are stocking up on multiple carts while the federal credit lasts, in order to resell them at a profit later…

Great.

This golf-cart fiasco perfectly illustrates tax policy…politicians dole out credits and loopholes for everything from plug-in cars to fuel efficient appliances, home insulation and vitamins…then insist that to pay for these absurdities they have no choice but to raise tax rates… 

This is kind of funny in a way.  We don’t generally think of golfers who tootle around in golf carts as needy, but they are just responding to incentives, so you can’t really blame them.

However, if you think of this as a wasted and misguided use of our money, then it’s not so funny.  And, if you multiply this sort of idiocy thousands of times in many different industries, then it starts to get infuriating.

Congress & the vast golf cart industrial complex

I doubt if anyone in Congress is in thrall to the vast golf cart industrial complex, but the American Recovery & Reinvestment Act is now funding well-to-do golfers who want a FREE personal golf cart.  I shudder to think of what’s next.

See also:

50 Ways the Feds Waste Our Money

CRASH for Clunkers

Clunking toward health reform

Convicts Cash In On Fed Stimulus

We’re in the best of hands

Clunk

Collateral Damage From Cash for Clunkers

• Business , Economy , Energy , Geopolitics , debt , deficit , income taxes
• Comments(6)

Kurt Brouwer October 17th, 2009

Source: Washington Post

As you can see, the red ink is flowing in Washington DC.

In a way though, this record budget deficit is a little less bad than it could have been.  As you can see from the next chart, also from the Washington Post, earlier this year the deficit was projected to be even larger, more in the range of $1.75 – 1.85 trillion.

Source: Washington Post

But, where do we go from here?  As I read through this piece from the Washington Post, I was not reassured that anyone in Washington DC actually has a handle on this.  Or, at least, the WaPo reporters could not find anyone who really has a plan [emphasis added]:

Record-High Deficit May Dash Big Plans (Washington Post, October 17, 2009, Lori Montgomery and Neil Irwin)

The federal budget deficit soared to a record $1.4 trillion in the fiscal year that ended in September, a chasm of red ink unequaled in the postwar era that threatens to complicate the most ambitious goals of the Obama administration…

…At about 10 percent of the overall economy, the gap between federal spending and tax collections is the largest on record since the end of World War II, and bigger in nominal terms than the past four years of deficits combined. Next year is unlikely to be much better, budget analysts say. And Obama’s current policies would drive the budget gap into the trillion-dollar range for much of the next decade.

This is the type of record we really don’t want.  And, I think we need to get past the partisan sniping.  Neither the Republicans nor the Democrats can claim any glory when it comes to spending control.  Politicians seldom get criticized for spending our money, so they keep right on doing it.  We can assign blame to different players and parties, but that still begs the question: ‘What the heck do we do?’

The WaPo article continues:

…A combination of factors combined to produce the $1.4 trillion gap. A deep recession caused tax revenue to plummet by more than $400 billion this year, while the government’s economic rescue efforts swelled federal spending. In all, the government spent $3.5 trillion in fiscal 2009, while taking in only $2.1 trillion in taxes, the Treasury Department said. Among the outlays: $113 billion in stimulus cash, $154 billion for the bank bailout and nearly $96 billion in capital payments to Fannie Mae and Freddie Mac, the troubled mortgage insurance giants that the government took over last year.

…”In the short term the deficit is not our primary problem,” said Heather Boushey, a senior economist at the left-leaning Center for American Progress. “The unemployment rate is near 10 percent, and the key thing is to get the economy growing, which will increase tax revenues. But in the long term we do need to think about the deficit problem and do something about it.”

Economists universally agree that the nation cannot run such massive deficits indefinitely. The question now facing Obama, budget experts said, is how to bring spending and revenue more closely into balance in the years ahead, after the economy fully recovers…

We cannot run such massive deficits indefinitely on that much there is agreement.  But, where is the plan for how we bring spending and revenues more closely into balance?  If there is one, I have not seen it.

• Business , Economy , Geopolitics , debt , deficit , income taxes
• Comments(1)

Kurt Brouwer October 15th, 2009

Some of the mutual funds that suffered most in the financial panic and bear market of 2008 have had excellent results in 2009.  Yet, nervous investors who took the hit in 2008 may not have been on board those funds in 2009.  In fact, there is solid evidence that investors often do not reap the rewards of being in volatile funds because they tend to buy in when the funds are hot and dump them when the funds turn cold.

This solid, yet oddly-titled, report from Morningstar gives us an example of how investors can get scalded when they buy a hot fund [emphasis added]:

How Some Investors Ruin a Great Fund (Morningstar, October 13, 2009, Russel Kinnel)

The stock market’s powerful rally since early March has been a blessing for patient investors. Many of the funds that suffered the most during the bear market have experienced the biggest rebounds. But a lot of investors didn’t stick around for the comeback. And who could blame them? It’s hard to hang tough when your fund has sunk 50% or more. Yet fleeing short-term laggards or jumping to the hot fund du jour often undermines investors’ returns.

This point is very important.  Hot funds can and do turn cold and t is excruciatingly difficult to stick around when that happens.  The financial panic of 2008 and early 2009 took down volatile funds, but even steadier performers (Longleaf Partners comes to mind–llpfx) fell to an extent that surprised many professional investors.  Staying the course when investments move against us is very difficult.

This next information is quite startling as Kinnel fleshes out how investors in volatile funds can and do snatch defeat from the jaws of victory.  Morningstar continues:

We at Morningstar have a way of capturing the true costs of fund hopping. In addition to a fund’s total return, we calculate what an average investor in the fund really earned. Investor returns adjust the officially reported returns based on cash flows into and out of funds. The gap between the figures essentially tells you how well or how poorly investors did at timing.

…CGM Focus (cgmfx) and T. Rowe Price Equity Income (prfdx) illustrate how volatility affects investor behavior. Both are run by excellent managers (Ken Heebner and Brian Rogers, respectively) who have beaten their peers over the long term. Focus’ 10-year annualized return of 19.6% thumps Equity Income’s 3.7% yearly return through the end of September 2009–as it should, because Heebner takes much bigger risks than Rogers. Heebner makes huge sector bets, holds only about 20 stocks, and even sells short stocks that he thinks are primed for a fall. Rogers aims for a steady ride by focusing on reasonably priced, dividend-paying stocks.

But consider what investors actually earned. Rogers’ clients have kept nearly all of the fund’s meager gains, earning an average of 3% annualized over the past 10 years. Heebner’s have somehow turned their fund’s terrific reported results into an annualized loss of 14%. They managed that feat by piling into CGM Focus after its extraordinary 80% gain in 2007, only to get pummeled when Focus plunged 48% in 2008…

Buying high and selling low

Anyone who has invested in mutual funds for a while has heard of Ken Heebner.  His funds are legendary for volatility, but also for stunningly high returns at times.  Despite the excellent average annual returns, this Morningstar data indicates that investors have actually had poor results due to buying in after the fund had a very hot year in 2007 and then dumping the fund when it turned cold in 2008.

If you want to own funds like CGM Focus, then you need to have lots of patience.   An incremental approach wouldn’t hurt either. That is, buy a modest amount of a volatile fund’s shares and then, assuming you can handle the volatility, when the fund hits a rough patch, buy a bit more.  Also, make sure you have plenty of diversification in the rest of your portfolio such that you own funds that are less volatile.

Whatever your investment strategy is, you need to stick with it.  If you like high octane mutual funds such as CGM Focus, then make sure you have a strategy in place to deal with the bad times.   Alternatively, if you do not want all that volatility, then you could invest in lower return/lower risk funds that make it easier for you to ride out the market’s inevitably downturn.  Either way is OK as long as you match your portfolio to your own personality and willingness take risks.

Full Disclosure:  Kurt Brouwer owns Longleaf Partners Fund (llpfx)

• ETF , Investing , Mutual Funds , Personal Finance
• Comments(2)

Kurt Brouwer October 14th, 2009

Source: Wall Street Journal

This chart projects our current employment – unemployment situation into the future based on job growth rates from the previous economic recovery.  As you can see, it will be a long hard slog to get back to the level of employment we had back in 2007.

Good news & bad news

The good news is that the number of initial claims for unemployment insurance is heading down and that is positive.  And, the number of people getting unemployment insurance also fell, but that statistic is less positive.  The bad news is that many people leaving unemployment insurance programs were doing so simply because they had exhausted their benefits, not because they had found a job.

The Wall Street Journal reports on the results from its regular survey of 48 economists as the economists survey the issue of employment [emphasis added]:

Scarred Job Market Expected to Weigh on Economy (Wall Street Journal, October 8, 2009, Phil Izzo)

“Never before has business shed so many workers so fast, so many people failed to find work who are looking for work, and so many dropped out of the labor force as in the current circumstance,” said Allen Sinai at Decision Economics.

The labor market’s tough road was underscored by Thursday’s report on weekly applications for unemployment insurance. The Labor Department reported that initial claims fell 33,000 to 521,000 in the week ended Oct. 3. The number of people collecting unemployment insurance also fell, but remained above six million.

The decrease in continuing claims likely reflects people exhausting their unemployment benefits after several months of looking for work in vain.

…On average the economists — not all of whom answered every question — expect the unemployment rate to peak at 10.2% in February. But even once the employment situation stops getting worse, economists expect recovery to come slowly. “It could take until 2014-15 before we see a 5% handle on unemployment again,” said Diane Swonk at Mesirow Financial. Persistently high unemployment could prove a political hot potato not only for the 2010 midterm elections for Congress but also for the 2012 presidential election.

Looking back at prior recessions, for example, the early 1990s, unemployment continued moving up for 15 months after the recession ended.  The last recession did not seek a peak in unemployment until 19 months after the recession ended. The economists in the Wall Street Journal survey see a peak in February 2010, which would be great although I would not hold my breath on that one.

However, as the chart at the top of this post shows, it could take many years for us to get back to the unemployment rates we saw in December 2007. This report from the Bureau of Labor Statistics is quite grim [emphasis added]:

The Employment Situation (U.S. Bureau of Labor Statistics, October 2, 2009)

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

…Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent…

As you can see, so far, 7.6 million jobs have been lost in this recession.  To get back to low levels of unemployment we saw in 2007, we would have to make up all those jobs plus we would need jobs for all the new entrants to the labor pool.  If the chart above is correct, that will not happen until 2014 or so.

Via: MarketBeat Blog

• Business , Economy , Geopolitics , Personal Finance
• Comments(0)

Kurt Brouwer October 13th, 2009

So far, 2009 has been a great year for bonds and an even better year for stocks.  However, the long-term numbers are quite different.  For the past 20 years, bonds have done better than stocks on average.

This chart from Steve Leuthold illustrates this fact and also points to an interesting historical comparison.  First, let’s check out the chart:

Source: Leuthold Group

The top line (black) is the S&P 500 and the lower line (blue) shows time periods when stocks are outperforming bonds (above the 0% line) or underperforming bonds (below the 0% line).

Right now is a very rare time period in which bonds have outperformed stocks on average for 20 years.  As you can see from the chart, stocks have generally done very well after one of these periods in which stocks struggled.

• ETF , Investing , Mutual Funds , Personal Finance , debt
• Comments(1)